Investing in the Internet Economy
Emeric J. McDonald
Director of Research
Co-Portfolio Manager, Amerindo Investment Advisors
Outlook for the New Internet Economy
Explosion of spending to adopt internet solutions
Re-alignment into winners and losers of the internet economy
Unified platform for computing communications and commerce
Scope of Change
400 - 500 million people globally online
One billion computers connected world wide
Several trillion dollars in electronic commerce
Universally accessible platform for economic endeavor
Internet Economy Investing
Applications: Yahoo! EBay, Amazon.com, Chemdex, NeoForma, Impresse, AdAuction
Software Infrastructure: Ariba, Vignette, Kana, i2 Tech, OnDisplay, RealNames
Physical Infrastructure: Cisco, Sun, BroadCom, EMC, Corvis, Cosine, Cobalt
The New MiddleMen
The Internet lowers the Cost of a Transaction
Result: An Explosion of New Transactions
Examples:
- Information Consumption (stock quotes, weather, maps, etc)
- Business to Consumer (Amazon Vs Barnes & Noble)
- Consumer to Consumer (eBay Vs Newspaper classifieds)
- Business to Business (Ariba, a global procurement network)
eCommerce Explosion
Mass Customization and Convenience
Bricks and Mortar crumble as cyber-shopping takes off
Production quantities of one unit for the perfect fit
The velocity of the economy accelerates
Supply Chain Planning reduces distribution costs
New Markets are created that could not exist before
Variable pricing for products based on supply and demand
A fundamental shift in power from suppliers to consumers
Decline in economy's profit friction
Consumer Market Economics
Huge fragmented buyer base, demographically segmented
Unilateral Decision Making
Demand for a wide variety of goods, i.e. horizontal market
Geographically dispersed with metropolitan concentration
Not an economic buyer, little back-office infrastructure
6% operating profit margin available to intermediaries
- WalMart - 6% operating margin
- Real Estate - 6% commission fee
- eBay - 6.5% transaction fee on gross merchandise sales
New Battle ground - Distribution
WebVan, Kozmo.com,Amazon
Business Market Economics
Concentrated buyer base, Fortune 500, Large 5000, 7M SMB
Collaborative Decision Making
Many vertical markets
Metropolitan concentration
Economic buyer, significant back-office infrastructure
Operating Margin Economics depend on structure
Fragmented or Concentrated Buyers
Existing Intermediaries or Distributors
Fragmented or Concentrated Suppliers
Margins could vary from 1% to 15% - Possibly going down over time
Current Valuation of Internet Stocks
Internet Stocks are largely following a Technology Precedent
Early winners go to huge premiums and stay there
"First Mover" company typically gets half of the market
Big tech. Winners increase 20, 50, 100 fold (its not too late!)
Only 10% of the wealth has been realized to date!